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Matt Machaj

Matt Machaj

Matt Machaj, PhD, is an economist whose research is focused on the monetary policy, the gold standard, and alternative monetary regimes. Matt is a university…

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Interest Rate Hikes on the Horizon? Not Likely

Based on the April 2014 Market Overview report


Recent weeks were not bad for those gold investors' hearts filled with golden hopes. The price of gold depends on many factors, but past patterns can give us important hints and suggest which of them are to be carefully studied and properly comprehended. If history were to teach us anything about gold's past market values it would most primarily be the following: watch out for the feds! Wise observation of government policies is the main driving force for what is happening in the gold market (surely along with supply factors in the longer run). As we discussed a month ago, this is the main reason for the observed correlation between the gold price and the interest rates. Not because interest rates per se are always casually linked to the gold price. But because interest rates are a reflection of current government policies.

This time we are going back to the possible interest rate hike subject, so passionately and almost obsessively discussed in the media. Last time, since the major change of the Fed chairman, we have heard that interest rate hikes are far, far beyond the horizon. Despite this, most of us apparently believe that interest rates will sooner or later have to be raised to the pre-stimulus range. It is unclear and remains a big mystery when this is likely to happen. Lately more has been said by the Fed (Janet Yellen) about this mystery of raising interest rates at the moment. We will get back to this in few paragraphs, but let us will debate the initial point. Despite what many observers claim, it simply may not be the case that the Federal Reserve should raise the interest rates. Actually the United States may still stay and bathe in a slumpy recession-type of environment for years to come. And the interest rates may stay as low as they are right now without any hikes visible on the horizon.

How may one support this thesis? Isn't it obvious that rates have to go up sooner rather than later? They may, but we refuse to simply take this for granted and echo that those hikes are coming closer and closer. Let us have a look at the case of Japan starting from the nineties, certainly a very good parallel of the United States right now. After a huge credit bubble that burst during the beginning of the 1990s, the real estate market collapsed along with the stock market. Debt stayed at record levels, and additionally, public debt also reached its highest peak in all of history. In these conditions the Bank of Japan started lowering the interest rate to absurdly low levels, of less than one percent. In the real terms the rates became virtually negative. This may have been understood as a temporary tool in order to support failing businesses. The raises of the interest rate were to happen one day. In the end it was not a temporary tool at all. It became permanent. Rates in Japan stayed low for a very significant period of time. They are still below one percent and have been staying at this level since 1995. 19 years and not much has changed. Japan is still in a way involved in the fight with the recession that started twenty years ago. The tools triggered back then are still in place today.

The same can happen with the United States.

Increases of the interest rates are not necessarily on the horizon. They can stay low for a very, very long time. Notice that they already stayed low for a relatively long time. Ben Bernanke set the interest rate close to the zero boundary at the end of 2008. They are staying at this level for a sixth consecutive year. Despite the fact that as soon as we reached a zero interest rate policy, experts started to debate when the time of reversal should come. Some of the optimists believed that it might happen within a few months. After a few quarters the story tends to come back like a boomerang. And as soon as it is about to hit, it disappears again.


Federal Funds Rate
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It is really hard to remind oneself that for at least one year, no recognizable expert has shown up and tried to scare us about upcoming interest rate hikes. Although we do not believe that the USA will necessarily repeat Japan's case, we refuse at the same time to take for granted that hikes are coming.

In our opinion investors shouldn't take Federal Open Market Committee statements that seriously, because they can quickly change. Do not treat stated goals as binding, because usually something else is at stake other than what is stated in their goal.

What does it indicate to us about the currents of the gold market and government's influence on it? Overall government spending, especially via the central banking system, is generally not decreasing and the Fed is making sure that banks can go on with pooling more funds into the broken financial system. Since this is about to be continued, it's likely to have a continued positive impact on the price of gold and gold market in general. Of course, not necessarily right away, but we are very likely to see gold higher in the coming years.

The above s based on the April gold Market Overview report. We encourage you to subscribe and read the full version today.

Thank you.


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